NZD/USD falls to near 0.5750 ahead of US CPI data
- NZD/USD weakens as stronger growth is unlikely to lift inflation pressures in New Zealand over the coming year.
- New Zealand’s Q3 GDP rose 1.1% QoQ, exceeding expectations of 0.9%.
- The US Dollar remains steady amid market caution ahead of the Consumer Price Index data due on Thursday.
NZD/USD extends its losses for the second successive session, trading around 0.5760 during the early European hours on Thursday. The pair weakens as the New Zealand Dollar (NZD) comes under pressure, even after data revealed stronger-than-expected economic growth.
New Zealand’s Gross Domestic Product (GDP) grew 1.1% quarter-over-quarter (QoQ) in the third quarter, beating expectations of 0.9%. Growth rebounded from a 1.0% contraction (revised from -0.9%) in Q2. On an annual basis, GDP expanded 1.3% YoY in Q3, recovering from a 1.1% decline (revised from -0.6%) in Q2 and matching market expectations.
However, substantial spare capacity persists in the economy, indicating that the recent pickup in growth is unlikely to generate inflationary pressures in New Zealand over the year ahead. As a result, expectations for a near-term rate hike by the Reserve Bank of New Zealand (RBNZ) have eased. Markets now price in a 40% chance of a rate increase by July next year, down from about 50% before the data release.
The NZD/USD pair also faces challenges as the US Dollar (USD) holds ground amid market caution ahead of the release of the delayed US Consumer Price Index (CPI) report later in the day, which is expected to provide further insight into how price pressures are evolving.
Federal Reserve (Fed) Governor Christopher Waller, who is under consideration to become chair of the central bank, reiterated his dovish stance on interest rates during a CNBC forum. “Because inflation is still elevated, we can take our time - there’s no rush to get down. We can steadily bring the policy rate down toward neutral,” Waller said.
The CME FedWatch tool suggests that Fed funds futures are pricing an implied 75.6% chance of a hold in rates at the US central bank's next meeting in January, up from nearly 74% a week ago.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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